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Ruling

Subject: capital loss - dividend stripping

Question 1

Is the rulee a qualified person under section 160APHO of the Income Tax Assessment Act 1936 (ITAA 1936) for the purposes of Division 207 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the first element of the cost base or reduced cost base of the Company shares their market value at the time they were gifted to the rulee in accordance with Section 112-20 of the ITAA 1997?

Answer

Yes.

Question 3

Is the rulee required to reduce under subsection 110-55(7) of the ITAA 1997 the reduced cost base of the Company shares following the receipt of dividends which were sourced from profits made by the Company before the rulee acquired the shares?

Answer

No.

Question 4

Will the rulee make a capital loss under subsection 104-25(3) of the ITAA 1997 as a result of the Company being deregistered?

Answer

Yes.

Question 5

Is the declaration of the dividends and the liquidation of the Company a scheme or arrangement to which section 177E or section 177D of Part IVA of the ITAA 1936 or section 207-155 of the ITAA 1997 apply?

Answer

No.

This ruling applies for the following periods:

Financial year ended 30 June 2007

Financial year ended 30 June 2008

Financial year ended 30 June 2009

Financial year ended 30 June 2010

Financial year ended 30 June 2011

Financial year ended 30 June 2012

Financial year ended 30 June 2013

The scheme commences on:

1 July 2006

Relevant facts and circumstances

A Company was incorporated prior to 20 September 1985.

A family discretionary trust (the parent's trust) was established prior to 20 September 1985.

The parent's trust owned ordinary shares in the Company. The shares were acquired prior to 20 September 1985.

Another entity owned a minority shareholding in the Company. The entity was established prior to 20 September 1985.

The parent's children were the primary beneficiaries of the parent's trust.

The parent died. Control of the parent trust passed to the children as directors of the corporate trustee.

The children have managed the investments of the Company since that time.

The majority of the Company's investments had been acquired before 20 September 1985. The majority of those investments were property.

Since the parent died, most of the Company's assets have been sold. All assets acquired by the Company on or after 20 September 1985 have been sold.

The children desired to separate their financial affairs. At a point in time after 20 September 1985, they sought legal advice as to the options available to vest the parent's trust and enable the beneficiaries to receive their entitlements under the trust.

An independent valuer was engaged to determine the market value of the Company.

The trustee for the parent's trust distributed the shares in equal proportions to the children in their capacities as beneficiaries.

One of the children sought legal advice regarding their potential shareholding in the Company as they had sufficient financial resources to support themselves.

The advice sought related to their potential defacto relationship and the process required to ensure that the shares in the Company did not remain in their personal name or form part of their personal estate upon their passing. Also the child did not want control of assets to pass to their own family at that time.

The child set up a trust (the rulee) for the benefit of their own children and gifted their shareholding in the Company to the rulee.

At this time, a substantial portion of the total assets of the Company was an amount on deposit with a bank.

The Company subsequently paid dividends over a period of a few years. They were comprised of franked and unfranked dividends.

The rulee has held the shares at risk and has not made related payments in respect of these dividends as described in section 160APHO of the ITAA 1936.

The Company's pre CGT assets were sold prior to the vesting of the parent's trust. The pre CGT capital profits reserve represented gains on the disposal by the Company of CGT assets acquired by it before 20 September 1985.

A liquidator was appointed to the Company.

The liquidator made an interim distribution and after paying expenses a final distribution.

The liquidator sourced the distributions from the following accounts:

· return of capital

· distribution to shareholders - cap profit res

The Company was deregistered.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 47,

Income Tax Assessment Act 1936 Section 160APHO,

Income Tax Assessment Act 1936 Section 177D,

Income Tax Assessment Act 1936 Section 177E,

Income Tax Assessment Act 1997 Section 104-25,

Income Tax Assessment Act 1997 Section 110-25,

Income Tax Assessment Act 1997 Section 110-55,

Income Tax Assessment Act 1997 Subsection 110-55(7),

Income Tax Assessment Act 1997 Subsection 112-20(1),

Income Tax Assessment Act 1997 Subsection 207-35(1),

Income Tax Assessment Act 1997 Subsection 207-145(1) and

Income Tax Assessment Act 1997 Section 207-155.

Reasons for decision

Question 1 - Is the rulee a qualified person under section 160APHO of the ITAA 1936 for the purposes of Division 207 of the ITAA 1997?

As a general rule, if a company makes a franked distribution to a trust, the assessable income of the trust will include the amount of the franking credit on the distribution (subsection 207-35(1) of the ITAA 1997).

However, the amount of the franking credit on the distribution is not included in the assessable income of the trust if the trust is not a qualified person in relation to the distribution (subsection 207-145(1) of the ITAA 1997).In addition, the trust will not be entitled to a tax offset, nor will franking credits flow through to the beneficiaries of the trust.

For the purposes of Division 207, a qualified person is defined in Division 1A of former Part IIIAA of the ITAA 1936.

Under section 160APHO in Division 1A of former Part IIIAA of the ITAA 1936, a taxpayer is a qualified person in relation to a dividend if:

· the taxpayer has held the shares for a continuous period of not less than 45 days (excluding the dates of purchase and sale and days on which the taxpayer has materially diminished its risks of loss or gain), and

· the taxpayer, or an associate, has not made nor is obliged to make a payment in respect of the dividend.

The rulee is the holder of ordinary shares. The rulee has held the shares until the company was liquidated without a material diminution of risk during this period nor has there been an obligation to make a payment in respect of a receipt of a dividend.

The rulee is a qualified person under section 160APHO in Division 1A of former Part IIIAA of the ITAA 1936 in relation to the dividends.

Question 2 - Is the first element of the cost base or reduced cost base of the Company shares their market value at the time they were gifted to the rulee in accordance with Section 112-20 of the ITAA 1997?

The cost base of a CGT asset is made up of five elements (section 110-25 of the ITAA 1997):

· money paid and the market value of any property given in respect of acquiring the asset;

· incidental costs incurred in acquiring the asset (such as stamp duty and legal fees);

· costs incurred in owning the asset (such as interest and costs of maintaining the asset, etc);

· capital expenditure incurred to increase the asset's value; and

· capital expenditure incurred to establish, preserve or defend title to the asset.

The reduced cost base of a CGT asset is similarly made up of five elements. All of the elements, except the third one, are the same as those for the cost base (section 110-55 of the ITAA 1997).

If a taxpayer did not incur any expenditure to acquire a CGT asset from another entity, the first element of the cost base, or reduced cost base, of the asset is its market value (paragraph 112-20(1)(a) of the ITAA 1997). Alternatively, paragraph 112-20(1)(c) of the ITAA 1997 also provides for the first element of the cost base, or reduced cost base, of an asset to be its market value if the taxpayer did not deal at arm's length in acquiring the CGT asset from another entity.

The child gifted their shares to the rulee. The rulee did not pay or give anything to acquire the shares. In effecting the transfer, the child and the rulee were not dealing with each other at arm's length. Paragraph 112-20(1)(a) (or 112-20(1)(c)), deems the first element of the cost base or of the reduced cost base of the shares to be their market value at the time of the transfer.

Question 3 - Is the rulee required to reduce under subsection 110-55(7) of the ITAA 1997 the reduced cost base of the Company shares following the receipt of dividends which were sourced from profits made by the Company before the rulee acquired the shares?

The reduced cost base of an asset that is a share in a company may be reduced under subsection 110-55(7) of the ITAA 1997 where the company makes a distribution out of profits derived by the company before the shares were acquired.

In particular, subsection 110-55(7) of the ITAA 1997 provides:

If your CGT asset is a share in a company, its reduced cost base is reduced by the amount calculated under subsection (8) if

· you are a corporate tax entity; and

· the company makes a distribution to you under an arrangement; and

A corporate tax entity as defined in section 960-115 of the ITAA 1997. It includes a corporate unit trust or a public trading trust.

A corporate unit trust is, amongst other things, a unit trust whose units are held by not fewer than 50 persons (subsection 102G(1) of the ITAA 1936). Similarly, a public trading trust is, amongst other things, a unit trust whose units are held by not fewer than 50 persons (subsection 102P(1) of the ITAA 1936).

As the rulee is not one in which units are held by not fewer than 50 persons, the rulee is not a corporate unit trust or a public trading trust. That is, the rulee is not a corporate entity for the purposes of section 960-115 of the ITAA 1997.

The rulee will not be required to reduce the shares' reduced cost base under subsection 110-55(7) of the ITAA 1997 as a result of receiving dividends out of profits made by the Company at a time before the rulee acquired the Company shares.

Question 4 - Will the rulee make a capital loss under subsection 104-25(3) of the ITAA 1997 as a result of the Company being deregistered?

A liquidator in winding up a company distributes the surplus funds of the company to the shareholders and cancels the company's shares.

In relation to the distribution of the surplus funds, under section 47 of the ITAA 1936, a distribution by a liquidator of a company to its shareholders is deemed to be an assessable dividend to the extent that it represents income derived by the company, regardless of when the income is derived. For the purposes of section 47, income also includes any capital gain which has not been disregarded. On the other hand, income properly applied to replace loss of paid-up share capital is excluded from assessability as a dividend.

In relation to the cancellation of the company's shares, shares are intangible assets and under section 104-25 of the ITAA 1997, CGT event C2 happens when ownership of an intangible CGT asset ends by the asset being cancelled. Distributions received from the liquidator usually represent capital proceeds for the cancellation of the shares; that is, the happening of CGT event C2. (Where a distribution by a liquidator occurs more than 18 months before the company is liquidated, CGT event G1 will apply instead.)

Notwithstanding that a distribution by a liquidator is a capital payment for the purposes of CGT event C2, the same distribution may also be an assessable dividend under section 47 of the ITAA 1936. When this occurs, section 118-20 of the ITAA 1997 reduces the capital gain arising to the shareholder to the extent the liquidator's distribution is assessable as a dividend.

The Commissioner accepts that if a liquidator appropriates or sources a particular fund of profit in making a distribution, that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 of the ITAA 1936. Thus, where a company has an amount that does not represent income derived by the company (for example, a pre CGT non-assessable gain), the liquidator may source a distribution from this amount if the company accounts have been kept so that the liquidator can clearly identify the specific profit. (See paragraph 2 and 4 of TD 95/10 which discusses source of funds and the Archer Brothers principle).

The Commissioner also accepts that if a liquidator distributes an amount representing capital contributed by shareholders, then the distribution is a non dividend return of capital regardless of whether the funds being returned could be traced to a receipt of income or profit (paragraph 3 of TD 95/10).

The total equity of the company included a capital profit reserve from pre CGT assets. Over the ensuing years the directors distributed as dividends amounts sourced from various profit and capital reserves, including retained earnings. Dividends paid during this period comprised franked and unfranked dividends.

At the date the liquidator was appointed, the total equity of the company was comprised of share capital and a capital profit reserve from pre CGT assets. After expenses of liquidation, the liquidator distributed these amounts.

It is accepted that the amount out of the share capital account is not a dividend for the purposes of section 47 of the ITAA 1936. This amount represents a return of capital contributed by shareholders. It is a capital amount.

It is also accepted that the amount out of the capital profits reserve from pre CGT assets is not a dividend for the purposes of section 47. The fashion in which the company's accounts had been kept identified the source of these amounts as being from the sale of pre CGT assets. It is noted that all dividends paid in the period prior to the appointment of the liquidator were sourced from post CGT capital profits or other profits of the Company. This amount is also a capital amount.

The liquidator made two distributions. The distributions occurred within 18 months of the company being deregistered. CGT event C2 happened.

The liquidator distributions to the rulee represent the capital proceeds for CGT event C2 happening to the shares owned by the rulee. The rulee made a capital loss to the extent these capital proceeds were less than the reduced cost base of the shares.

Question 5 - Is the declaration of the dividends and the liquidation of the Company a scheme or arrangement to which section 177E or section 177D of Part IVA of the ITAA 1936 or section 207-155 of the ITAA 1997 apply?

Section 177E of Part IVA of the ITAA 1936 can apply to a scheme where a taxpayer (a shareholder) receives profits of a company in a substantially tax advantaged form thus avoiding tax that would be payable if the profits were paid as a dividend.

Section 177D of Part IVA of the ITAA 1936 can apply to any scheme where a taxpayer obtains a tax benefit in connection with the scheme and it can be concluded that the scheme was entered into or carried out for the dominant purpose of enabling a tax benefit to be obtained. Section 177D can apply to a scheme notwithstanding that section 177E does not apply to the scheme.

Section 207-155 of the ITAA 1997 will apply where a distribution is made to a taxpayer (a shareholder) as part of a dividend stripping operation.

Section 177E

Section 177E of the ITAA 1936 can apply to a scheme by way of or in the nature of dividend stripping. If paragraphs 177E(1)(a) to (d) of the ITAA 1936 are satisfied, paragraphs 177E(1)(e) to (g) have effect and the scheme is taken to be a scheme to which Part IVA of the ITAA 1936 applies.

Broadly section 177E will apply where:

· there is scheme by or in the nature of dividend stripping involving the disposal of property of a company (paragraph 177E(1)(a))

· in the opinion of the Commissioner the disposal represents a distribution of profits (paragraph 177E(1)(b))

· if the company had paid a dividend out of profits instead, the dividend would be included in the assessable income of the shareholder (paragraph 177E(1)(c)), and

· the scheme commenced after 27 May 1981 (paragraph 177E(1)(d)).

Paragraph 177E(1)(a)

Paragraph 177E(1)(a) of the ITAA 1936 requires property of the company to be disposed of under a scheme that is a scheme by way of or in the nature of dividend stripping; or a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping.

Scheme is defined in subsection 177A(1) of the ITAA 1936. The definition is very broad and encompasses one step or a series of steps which together can be said to constitute a scheme, plan, and course of action or conduct.

The term dividend stripping is not defined nor does it have a precise legal meaning. Nonetheless, it can be said that in its traditional sense a dividend stripping scheme would include a scheme under which a company with accumulated or current years' profits that are represented by cash or other readily realisable asset, releases those profits to its shareholders in a non-taxable form. At its broadest, it involves the release of profits to shareholders in a tax advantaged form, regardless of the method used to achieve it. (Taxation Ruling IT 2627.)

The term disposal of property of the company is defined in paragraph 177E(2)(a) of the ITAA 1936. The definition is very broad and includes the payment of a dividend by the company.

Paragraph 177E(1)(b)

Section 177E(1)(b) of the ITAA 1936 requires that the Commissioner form an opinion that the disposal of property represents, in whole or in part, a distribution of profits of the company of any accounting period (a current, earlier or later accounting period).

Paragraph 177E(1)(c)

Paragraph 177E(1)(c) of the ITAA 1936 looks at whether the amount determined by the Commissioner to be a distribution of profits represented by the disposal of the property would have been included (or might reasonably be expected to have been included) in the assessable income of a taxpayer of a year of income if that amount had been paid as a dividend instead.

Paragraph 177E(1)(d)

Paragraph 177E(1)(d) of the ITAA 1936 requires the scheme to have been entered into after 27 May 1981.

Discussion

The parent's trust was established prior to 20 September 1985. The parent's trust was the majority shareholder of the Company which had been incorporated prior to 20 September 1985. The parent died and control of the trust passed to the children who became directors of the corporate trustee.

The children sought advice on options available to vest the parent's trust and enable the beneficiaries to receive their entitlements under the trust. The parent's trust vested and the shares were transferred to the children. One child immediately gifted the shares to the rulee.

A substantial portion of the total assets of the Company was a bank deposit. It is accepted that the dominant purpose of the children was to wind up the affairs of the Company and to distribute its funds. At the earliest, this process could be said to have commenced when steps to transfer ownership of the shares to the beneficiaries were taken.

During the subsequent period the Company paid franked and unfranked dividends. A liquidator was appointed who distributed the balance. The process ended with deregistration of the Company.

At the start, the total equity of the company included share capital and a pre CGT capital profit reserve as well as various other reserves. The records kept by the Company have recorded the accounts and reserves from which amounts were paid. The Company distributed its profits as it saw fit, out of those reserves available to it as it saw fit.

Prior to appointment of the liquidator, the directors had distributed all the trading profits and other reserves other than the share capital and a pre- CGT capital gains reserve.

In summary:

The scheme commenced after 27 May 1981.

The Company had paid franked and unfranked dividends prior to appointment of the liquidator.

The dividends were paid out of the various reserves of the Company. The dividends were assessable as income.

The liquidator's distributions comprised share capital account and pre CGT capital profits. The pre CGT capital profit represents the gains from the increase in value of assets acquired before the implementation of the capital gains provisions.

The Company had ceased to carry on any meaningful business and retained sizeable amounts on deposits. The liquidator's distributions arose in the course of winding up the company.

The Company's accounts had been kept so that the liquidator could identify the account from which the funds arose. The liquidator appropriated the funds in making the distribution. The liquidator was entitled to pay the funds so paid.

Conclusion

There was a scheme as described in subsection 177A(1) of the ITAA 1936. The scheme was entered into after 27 May 1981 as required by paragraph 177E(1)(d) of the ITAA 1936.

Dividends paid by the Company prior to appointment of the liquidator were paid in the normal course of distributing the profits of the Company. Such actions do not constitute a dividend stripping scheme for the purposes of paragraph 177E(1)(a) of the ITAA 1936.

The distributions made by the liquidator were paid in the normal course of winding up the company. The distributions were sourced from share capital and pre-CGT gains made by the Company. It was open to the liquidator to source the payments from these reserves and in doing so they were not assessable as dividends but were a return of capital. Again such actions do not constitute a dividend stripping scheme for the purposes of paragraph 177E(1)(a) of the ITAA 1936.

The distribution of the Company's profits occurred in a manner in which it would be expected that a family company would be wound up and its funds distributed. The transactions do not constitute a scheme by or in the nature of dividend stripping. The requirement in paragraph 177E(1)(a) is not satisfied.

Section 177E of the ITAA 1936 does not apply.

Section 177D

Section 177D of the ITAA 1936 can apply to any scheme that has been entered into after 27 May 1981. The matters to be taken into account in determining whether Part IVA should apply are:

· the manner in which the scheme was entered into or carried out (subparagraph 177D(b)(i))

· the form and substance of the scheme (subparagraph 177D(b)(ii))

· the time at which the scheme was entered into and the length of the period during which the scheme was carried out (subparagraph 177D(b)(iii))

· the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme (subparagraph 177D(b)(iv))

· any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme (subparagraph 177D(b)(v))

· any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme (subparagraph 177D(b)(vi))

· any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out (subparagraph 177D(b)(vii)); and

· the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi) (subparagraph 177D(b)(v)ii)

As stated in the discussion of section 177E of the ITAA 1936 above, the scheme to distribute the Company's funds (the Company scheme) commenced after 27 May 1981. The scheme is one to which section 177D of the ITAA 1936 can apply.

There is also a separate scheme (the rulee scheme) in relation to the transfer of the Company's shares by the child to the rulee. The child had sought legal advice regarding their potential shareholding in the company. The child gifted the shares to the rulee immediately after the parent's trust vested. As this scheme commenced after 27 May 1981, the scheme is also one to which section 177D of the ITAA 1936 can apply.

Subparagraph 177D(b)(i) - manner in which the scheme was entered into or carried out

The manner in which the schemes were entered into and carried out has been described above in the discussion of the application of section 177E.

Briefly the Company had substantial amounts on deposit. Advice was sought. It was decided to vest the parent's trust and transfer the shares it held to the children in equal portions. The Company subsequently distributed all the trading profits and post CGT gains as dividends. A liquidator was appointed. The liquidator distributed the balance of the funds, representing the share capital account and pre-CGT capital profits, and wound up the Company.

The Company scheme was carried out in a way that it could be expected that a family controlled company would be wound up. The funds were disbursed in a tax effective way for the family group and consistent with the way in which directors and a liquidator would wind up the affairs of a company in a similar situation.

In relation to the rulee scheme, the child immediately gifted to the rulee the shares they had received on the vesting of the parent's trust. The rulee was to benefit the child's own family. The rulee became the owner of the shares previously owned by parent's trust.

Subparagraph 177D(b)(ii) - form and substance of the scheme

The form and substance of the Company scheme are consistent with the way in which directors and liquidators would be expected to wind up companies.

The child gifted their shares to the rulee. The rulee subsequently received all Company distributions arising from ownership of the shares.

Subparagraph 177D(b)(iii) - timing and duration of the scheme

The timing of both schemes was such that the schemes extended more or less concurrently over several years. The period was not inconsistent with a gradual wind down of the Company and a disbursement of funds. No significant advantages were sought by the extended period.

Subparagraph 177D(b)(iv) - result that would be achieved but for Pt IVA

The funds were disbursed in a tax effective way for the family group and consistent with the way in which directors and a liquidator would wind up the affairs of a company in a similar situation.

Subparagraph 177D(b)(v) - change in the financial position of the taxpayer

In relation to the Company scheme, the children as beneficiaries and directors of the trustee of the parent's trust could be expected to receive the benefits of any distribution from the Company. The vesting of the parent's trust converted indirect interests in a distribution into direct interests.

In relation to the rulee scheme, the child chose to gift their interest in any distributions (ie. the shares) to their family trust. As an owner of shares it was open to the child to transfer the shares to also benefit their family.

Subparagraph 177D(b)(vi) - change in the financial position of any person connected with the taxpayer

The financial interests of the broader family group encompass the Company and the parent's trust. The Company scheme was undertaken to distribute the benefits among the family members. It was consistent with the way in which a family company that no longer traded would be wound up.

The child, in transferring the shares to the rulee, excised the shares from their personal financial affairs and placed them where they would benefit their family.

Subparagraph 177D(b)(vii) - any other consequence for the taxpayer or a connected person

The Company scheme was undertaken to distribute the benefits among the family members. It was consistent with the way in which a family company that no longer traded would be wound.

The child, in transferring the shares to the rulee, placed the shares beyond any claim or demand against them or their estate.

Subparagraph 177D(b)(viii) - nature of any connection between the taxpayer and a connected person

The scheme of liquidating the company involved members of a family group. The transactions were ones that indicate that the children wished to simplify their financial arrangements to the best advantage of their own family groups.

The child placed the shares beyond any claim or demand against them or their estate and placed them where they would benefit their family.

Conclusion

The Company scheme

The manner in which the scheme was entered into has the characteristics of an ordinary family dealing. The scheme was undertaken to distribute among family members the benefits of a family company that no longer traded.

The children as beneficiaries and directors of the trustee of the parent's trust would be expected to receive the benefits of any distribution from the Company. The vesting of the parent's trust converted indirect interests into direct interests as shareholders.

The substance of the scheme was straightforward and transparent. It was consistent with the way in which directors or a liquidator would be expected to wind up the affairs of a company.

The dividends paid by the Company during the prior to the liquidator being appointed were paid in the normal course of distributing the profits of the Company.

The distributions made by the liquidator were paid in the normal course of winding up the company. The distributions were sourced from share capital and pre-CGT gains made by the Company. It was open to the liquidator to source the payments from these reserves and in doing so they were not assessable as dividends but were a return of capital.

The timing and duration of the scheme does not have any particular bearing on the outcome.

A consideration of the eight factors leads to the conclusion the dominant purpose of undertaking the Company scheme was not to obtain a tax benefit.

Section 177D of the ITAA 1936 does not apply to the rulee in relation to the dividends and liquidator distributions paid to the rulee under the Company scheme.

The rulee scheme

The manner in which the scheme was entered into has the characteristics of an ordinary family dealing. The scheme was undertaken to distribute among the child's immediate family the benefits of a shareholding in the Company. In transferring the shares to the rulee, the child placed the shares beyond any claim or demand against them or their estate.

It was open to the child to transfer ownership of the shares and with it any right to receive dividends associated with that ownership. The rulee enjoyed the right to dividends or liquidator distributions that went with ownership.

The substance of the scheme was straightforward and transparent. The distribution of the Company's profits occurred in a manner in which it would be expected that a company would be wound up and its funds distributed.

The timing and duration of the scheme does not have any particular bearing on the outcome.

The connections between the rulee and other parties connected with the scheme are explainable by ordinary family dealings

A consideration of the eight factors leads to the conclusion the dominant purpose of undertaking the rulee scheme was not to obtain a tax benefit.

Section 177D of the ITAA 1936 does not apply to the rulee in relation to the transfer of the shares to the rulee under the rulee scheme.

Section 207-155

Section 207-155 of the ITAA 1997 will apply where a distribution is made to a taxpayer (a shareholder) as part of a dividend stripping operation.

A distribution made to a shareholder is taken to be made as part of a dividend stripping operation if the distribution arose out of a scheme that was by way of or in the nature of dividend stripping or a scheme having substantially the same effect.

As noted in the discussion of section 177E of the ITAA 1936 above, the dividends and liquidator distributions did not arise out of a scheme that was by way of or in the nature of dividend stripping or a scheme having substantially the same effect

Section 207-155 of the ITAA 1997 does not apply in relation to the dividends and liquidator distributions paid to the rulee.